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The effect of Eurosystem asset purchase programmes on euro area sovereign bond yields during the COVID-19 pandemic

George Hondroyiannis () and Dimitrios Papaoikonomou ()

No 291, Working Papers from Bank of Greece

Abstract: We investigate the effect of Eurosystem Asset Purchase Programmes (APP) on the monthly yields of 10-year sovereign bonds for 11 euro area sovereigns during January-December 2020. The analysis is based on time-varying coefficient methods applied to monthly panel data covering the period 2004m09 to 2020m12. During 2020 APP contributed to an average decline in yields estimated in the range of 58-76 bps. In December 2020 the effect per EUR trillion ranged between 34 bps in Germany and 159 bps in Greece. Stronger effects generally display diminishing returns. Our findings suggest that a sharp decline in the size of the APP in the aftermath of the COVID-19 crisis could lead to very sharp increases in bond yields, particularly in peripheral countries. The analysis additionally reveals a differential response to global risks between core and peripheral countries, with the former enjoying safe-haven benefits. Markets’ perceptions of risk are found to be significantly affected by credit ratings, which is in line with recent evidence based on constant parameter methods.

Keywords: Euro area; asset purchase programmes; sovereign bond yields; time-varying parameters. (search for similar items in EconPapers)
JEL-codes: C33 E44 E52 E58 F34 G15 (search for similar items in EconPapers)
Pages: 43
Date: 2021-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-isf, nep-mac and nep-mon
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